Owner In Bidding Case Protected By Privilege, Discretion, and Exclusion of Liability Clause

Owner In Bidding Case Protected By Privilege, Discretion, and Exclusion of Liability Clause

Rankin Construction Inc. v. Ontario

In 2005, the Ontario Ministry of Transportation (MTO) invited bids for the widening of a highway. Rankin Construction Ltd. submitted the lowest bid but the MTO rejected it as non-compliant.

The bid documents required bidders to declare the value of any imported steel that they proposed to use in the project. Included in the bid documents was a notional 10% discount on Canadian steel. Rankin mistakenly did not declare the approximately $500,000 value of the H-Piles in its bid as imported steel.

As a result, the discount was applied to this amount, and the bid total was treated as being approximately $50,000 less than Rankin actually bid. However, even adjusted to exclude the benefit conferred by the mistake, Rankin’s bid would still have been $1.7 million lower than the next lowest.

Hard Rock Paving, a competing bidder, complained. The MTO conducted an investigation and advised Rankin that its bid was non-compliant. On the advice of counsel, the MTO awarded the contract to Hard Rock.

Rankin sued the Province of Ontario for loss of profit in the amount of $5 million. At trial, it argued that a bidding contract, Contract A, arose between it and the MTO when it submitted its bid, and that the MTO breached that contract (a) when it conducted an investigation in response to Hard Rock’s complaint, and (b) when it failed to award the construction contract, Contract B, to Rankin.

The trial judge dismissed Rankin’s action. The Court of Appeal agreed with the decision but for somewhat different reasons.

Contract A

The trial judge concluded that the failure by Rankin to declare the value of the H-Piles as imported steel constituted material non-compliance with the bid documents and that, therefore, Rankin’s bid did not amount to acceptance of the MTO’s invitation to bid. Accordingly, no Contract A was formed, and Rankin could not sue for its breach.

The Court of Appeal disagreed. Justice Hoy, writing for the Court, held that whether Contract A has arisen and on what terms, if any, should be implied are “case-specific determinations.” In other words, the terms of the bid call as reflected in the bid documents must be scrutinized to determine whether the parties intended contractual relations to arise on the submission of a bid.

Justice Hoy found that the Instructions to Bidders issued by MTO took into account the possibility that a bid might not be compliant. For example, bidders were required to include a bid deposit with their bids but the bid documents also provided that bids not accompanied by a bid deposit in the required amount may be rejected. The fact that MTO specifically addressed the consequences of the submission of a materially non-compliant bid is evidence, wrote Justice Hoy, that MTO intended that Contract A should come into effect even if the bid submitted was non-compliant. The bid documents included other provisions that reinforced this conclusion.

The court therefore found that Contract A did arise when Rankin submitted its bid. Rankin’s non-compliance with the bid documents only meant that Rankin could not be awarded Contract B, even if it was the lowest bidder.

Contractual relations usually come into existence on the submission of a bid, added Justice Hoy, and found this to be a desirable result: “[I]t provides greater certainty as to the rights and obligations of the bidders and the owner, and may reduce the frequency of litigation arising out of the award of tenders.”

Right to Investigate for Non-Compliance

In Double N Earthmovers Ltd. v. Edmonton (City), the Supreme Court of Canada found that the owner did not have an implied duty to investigate allegations of non-compliance by a rival bidder. Rankin argued that an owner cannot investigate allegations of non-compliance unless the bid documents specifically give it the right to do so or the owner has a written policy to that effect.

The trial judge rejected this argument:

[T]o require an owner to stay its hand and refrain from making enquiries in the face of information that it will be impossible for a bidder to fulfill a material requirement of its bid, and to award the contract to such a bidder, does not promote the integrity of the bidding process.

The Court of Appeal agreed with the trial judge. Furthermore, there was no evidence that MTO investigated complaints in relation to Rankin but not in relation to any other bidders, or that the MTO was not otherwise fair and consistent in its assessment of the bids submitted in accordance with its invitation to bid.

The Discretion and Privilege Clauses

Rankin essentially argued that its non-compliance was merely a formality: it intended to use Canadian steel for the H-Piles, and had made an honest mistake. Even adjusting the bid amount for this mistake, it was still the lowest bidder by a significant margin.

Justice Hoy agreed with the trial judge that, based on the terms of Contract A, MTO was not required to accept Rankin’s non-compliant bid. The Instructions to Bidders contained both what is known as a “privilege clause” (the right not to accept the lowest or any bid) and a “discretion clause” (the right to waive formalities, i.e., minor irregularities, as the interests of the owner may require), both contained in one paragraph:

The Ministry reserves the right to reject any or all tenders, and to waive formalities as the interests of the Ministry may require without stating reasons, therefore, the lowest or any tender may not necessarily be accepted.

Justice Hoy viewed Rankin’s non-compliance as a formality because she accepted that the bidder honestly intended to use Canadian steel. She also took into account the fact that Rankin’s non-compliance “did not materially affect the price or performance of Contract B”; this confirmed her opinion that the mistake amounted to a formality.

Contract A did not require MTO to waive formalities but it did give the owner the discretion to do so. Where the owner exercises that discretion reasonably and in good faith, it cannot be sued for failing to waive a formality, decided Justice Hoy. MTO acted in good faith, and its conclusion that Rankin’s non-compliance was more than a formality — correct or not — was reasonable.

The court also took into account the fact that, had MTO been wrong in its conclusion, it risked being sued by the other bidders. They would have argued that Rankin’s non-compliance was more than a formality, and that MTO was therefore not entitled to waive it. That is indeed what happened to MTO in a previous case, Bot Construction Ltd. v. Ontario (Ministry of Transportation), which similarly involved a request for bids with a price preference for Canadian steel.

The Exculpatory Clause

In addition to the privilege clause and the discretion clause, MTO’s Instructions to Bidders contained, for good measure, also an “exculpatory clause”:

The Ministry shall not be liable for any costs, expenses, loss or damage incurred, sustained or suffered by any bidder prior, or subsequent to, or by reason of the acceptance or the non-acceptance by the Ministry of any Tender, or by reason of any delay in acceptance of a Tender, except as provided in the tender documents.

Rankin argued that the exculpatory clause did not insulate the Province from liability for MTO’s breach of Contract A. The trial judge concluded that Rankin’s claim was barred by the exculpatory clause: Rankin’s claim was clearly covered by the wording of the clause, even if MTO had erred in considering Rankin’s bid materially non-compliant.

Further, the exculpatory clause was not “unconscionable” at the time the contract was made, and there was no overriding public policy that would justify the court’s refusal to enforce it.

In his view, even if MTO erred in investigating whether Rankin’s bid was compliant, it did so “not to subvert the integrity of the bid process in order to gain some unfair advantage, but rather to promote the integrity of the process”. That was another reason why its conduct was protected by the exclusion clause.

Justice Hoy agreed. She stressed that the relevant commercial context must also be considered. Bidders are sophisticated parties and are free to choose not to submit a bid in the face of a broad exculpatory clause in the bid documents. If, faced with such a clause, bidders do not respond to requests for bids, market forces will drive the owner to modify the terms of its bid documents to stimulate competitive bids. She offered a hint: an owner might choose to limit an unsuccessful bidder’s damages to its costs of preparing its bid, instead of barring entirely the claims for profits lost as a result of the award of the bid to a competitor.

Note: Readers should not rely solely on the interpretation of a court decision summarised in this publication, but should consult their own solicitors as to the interpretation of the written reasons rendered by the court. The publishers and editors disclaim any liability which may arise as a result of a reader relying upon contents of this publication. The opinions expressed in the articles are those of the authors, and not necessarily those of the publishers and editors of the Construction Law Letter.